Rice Energy, a natural gas producer with a low credit rating, raised $900 million in a bond sale in April, $150 million more than it originally sought. Investors snapped up the bonds even though the Canonsburg (Pa.)-based company has lost money three years in a row, has drilled fewer than 50 wells (most named after superheroes and monster trucks), and said it will spend $4.09 for every dollar it earns (before interest, taxes, depreciation, and amortization) in 2014.
The U.S. drive for energy independence is backed by a surge in junk bonds that has been as vital to the boom as the breakthroughs in drilling technology. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown ninefold, according to Barclays. That’s what keeps the shale revolution going even as companies spend money far faster than they make it. “There’s a lot of Kool-Aid that’s being drunk now by investors,” says Tim Gramatovich, chief investment officer of Peritus Asset Management. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”